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Greece’s recent return to financial stability hasn’t stilled economists like Nouriel Roubini and Ken Rogoff, who argue that only a Greek exit from the eurozone will return the country to growth and long-term sustainability.In an article published in VoxEU today, however, IJ Partners Senior Strategist and former IMF Executive Board Member Miranda Xafa argues that a Greek exit from the euro is merely the easy way out, with poor consequences for the country down the road.
On one hand, Xafa admits that the reform program will indeed make Greece’s transition back to debt sustainability protracted and trying. Indeed, she points out that the country might as well treat the transition as a transformation from communism:
The new IMF/EU-funded programme includes broad-based structural reforms intended to introduce flexibility in labour markets and intensify competition in goods and services markets. In fact, the new Greek programme reads like a blueprint for reforming a post–Soviet bloc country circa 1990. It includes privatisation, administrative reform, labour and product market reform, and it provides for bank recapitalisation to ensure that the debt restructuring will not destabilise the banking system. While all this is positive for medium-term competitiveness and growth, it also means that the reform process will be protracted and politically difficult.
However, reverting to the drachma and halting the current financial overhaul would do nothing to truly change the way business is conducted in Greece. That’s because an inflationary “Grexit” would place all the pressure on the poor and provide little incentive for Greek politicians to change their ways:
If Greece drops out of the Eurozone, the inevitable adjustment to a lower standard of living will be unfairly distributed because it will happen through inflation. Low-income people are the most exposed to inflation because they do not own foreign bank accounts or other inflation-protected assets. The redenomination of all contracts from euros to drachmas is tantamount to expropriation of savings, while large debtors will benefit –including Greece’s two main political parties, which have borrowed three times their annual budget subsidies from a state-controlled bank. It is also doubtful that Greece would attract much investment from abroad. Who would guarantee the stability of the drachma after its devaluation? Surely not the same political system that brought Greece to the brink of disaster. No Greek exporter, hotel, or restaurant will convert euro income into drachmas, knowing that the drachma tomorrow will be worth less than today. The drachma would be the main currency for government employees and pensioners only. The result would be economic chaos and uncontrollable social explosion.
What led Greece into this mess is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favours to special interest groups in exchange for vote-buying. If you offer the printing press to this political system, it will just go back to business as usual. It is by cutting off their access to cash, by remaining in the euro, that you can force political change along with economic change.